BAHAMAS sets out path to The Foreign Accounts Tax Compliance Act (“FATCA”) Compliance

The Government of the Bahamas has agreed that the The Bahamas shall achieve compliance under the United States Foreign Accounts Tax Compliance Act (“FATCA”) by negotiating and entering into a Model 1 Intergovernmental Agreement with the United States Department of the Treasury.  The Government of the Bahamas has also agreed to the the establishment of an inter-Ministerial committee on FATCA under the leadership of the Ministry of Financial Services be established with the following mandate:

i. To prepare an implementation strategy for FATCA, inclusive of the draft FATCA Agreement;

ii. To prepare and issue a Request for Proposals (RFP) for the development and implementation of a FATCA reporting system; and

iii. To oversee all aspects of the implementation of The Bahamas’ FATCA compliance.

iv. To oversee the necessary legislative reforms.

FATCA was signed into United States law in 2010 through the US Hiring Incentives to Restore Employment Act.  FATCA came into force on 1st January, 2013 and has the effect of imposing new reporting requirements on financial institutions throughout the world to the United States Internal Revenue Service (IRS) with respect to certain information on US persons and requires non-US entities to provide specific attestations about any US owners.  Financial institutions that do not comply with the FATCA requirements face a 30% withholding tax on all of their US payments and will be deemed a “non-Participating Foreign Financial Institution”.

FATCA has far reaching implications on financial institutions throughout the world and will require significant expense and training for financial institutions throughout the world.  FATCA compliance can be achieved in two ways:  (a) by FFIs entering into agreements individually and directly with the IRS; alternatively (b) where a country’s laws prohibit financial institutions from entering into such agreements, the government of that country may enter into an Inter-Governmental Agreement (IGA) with the United States Government.  The United States Treasury has released two (2) IGA Models.

Under a Model I Intergovernmental Agreement, the government enters into an agreement with the United States whereby the Competent Authority, in our instance the Ministry of Finance, would be responsible for directing its financial institutions (as defined under FATCA) to compile the relevant information.  The government would then be responsible for collecting this data electronically from the relevant financial institutions.  The Competent Authority would be obligated to report that data to the Internal Revenue Service (IRS) annually. Model I includes reciprocal and non-reciprocal versions.  In the reciprocal version of the agreement, the United States undertakes to provide equivalent information to the partner jurisdiction on the tax payers (i.e. citizens or residents) of the partner country that have accounts in the United States. In the non-reciprocal version of the Agreement, the information flow is one way – in this instance, from The Bahamas to United States.

Work of the Ministry of Financial Services on FATCA

The Ministry of Financial Services initiated its education and private sector consultation work programme on FATCA in September 2012.  In January, 2013 the Ministry launched its FATCA strategy document which provided a road map to achieving FATCA compliance.  The strategy provided an outline of the key issues and definitions related to FATCA. To ensure that the views of the industry were included in the work of the Ministry with respect to FATCA, the strategy also called for the installation of a small advisory working group.   The advisory group included representatives from the private sector and the Attorney General’s Office, the Ministry of Finance and the financial sector regulators.

Discussion with the United States on FATCA

On 1st March, 2013, I led a delegation to Washington, D.C. to meet with US Treasury Department and Internal Revenue Service (IRS) officials to commence discussions on FATCA.  I provided the US officials with a brief overview of the positive 10-year experience between the two countries with respect to the TIEA process.  It was noted that The Bahamas was committed to honouring its treaty obligations.  In that initial meeting, I expressed an interest in exploring an IGA with the United States and outlined The Bahamas key concerns with respect to FATCA, namely:

• The registration and FFI agreement requirement for trusts managed by professional trustees were extremely onerous and essentially created a trust register for all non-US trusts while US trusts were not subject to the same provisions;

• The extent of interaction contemplated between the IRS and the Bahamian financial firms under Model 2, including the information which could be requested and the possibility of audits by the IRS of FFIs;

• The process for appropriately accommodating legal challenges and jurisdictional matters;

• The possibility of a combined Model I and Model II approach, given the international nature of The Bahamas’ financial sector where the head offices of various firms would be utilizing a variety of compliance methods depending on their jurisdiction. 

• The need for a regional FATCA Workshop in The Bahamas in April/May 2013.

Treasury/IRS Conference 9th April, 2013

Notwithstanding the US government sequester at the time, as a result of sustained effort on the parts of both my Ministry and the US Treasury, plans were finalized for The Bahamas to host the first regional conference on FATCA facilitated by United States Treasury and Internal Revenue Service officials at the British Colonial Hilton Hotel.  The meeting attracted over 300 professionals including government and private sector officials from at least 10 Caribbean countries.  In addition to the open sessions of the meeting; the Ministry had arranged for a closed door session with regional government officials and private bilateral consultations with 10 Caribbean governments.

The Bahamas met privately with the US officials before the FATCA conference on 8th April, 2013.  In that meeting, my Ministry forcefully and articulately advanced The Bahamas’ concerns with the requirement that all trusts managed by professional trustees (even those without US interests) be required to register and enter into an FFI agreement with the IRS.

On 9th April, 2013 the day following our meeting mentioned above, the US Treasury updated its FATCA exemption Annexes (Annex II) of both Model IGA agreements to include an exemption for “trustee sponsored trusts” such that a trust with a professional trustee, would be exempt from the registration and FFI agreement requirements where the due diligence and reporting (where there are US interests) are carried out by the professional trustee which is an FFI under FATCA.  The significance of this amendment for The Bahamas trust industry cannot be overstated.  The Bahamas also met in further bilateral consultations with the US Treasury on 10th April, 2013.  In those meetings further exemptions were obtained under Model 1 for Private Trust Companies and certain Master Feeder Fund Structures under the “sponsored deemed compliant” categories.

Considerations in the Ministry’s IGA Model Recommendation

In coming to a recommendation, my Ministry considered the following factors:

a. The model choice that would achieve the greatest preferential treatment for key Bahamian financial sector products such as trusts and funds;

b. The model which would result in the lowest registration, reporting and other administrative burdens to Bahamian financial institutions;

c. Cost for the Government compared to long term benefit; and

d. Principled considerations related to the precedent for the automatic exchange of tax information between governments versus viewing FATCA as a purely private sector initiative.

e. The reporting, legal and jurisdiction preferences for the financial services industry.

Based on the Ministry’s careful review of the FATCA regulations, the Model Intergovernmental Agreements, consultations with the US Treasury Department and the IRS and consultations with industry the Government of the Bahamas decided that The Bahamas adopt the Model 1 FATCA agreement without reciprocity based on the following:

a. The Model 1 Agreement provides the greatest level of preferential treatment in terms of exemptions for key Bahamian products;

b. Model 1 should result in lower costs and reporting burdens to Bahamian FFIs.  

c. While Model 1 requires that a reporting infrastructure be developed within the Competent Authority, such an infrastructure may be necessary in the long run given international developments in tax cooperation.  Additionally, the Government has been advised that establishing such a reporting infrastructure should not be prohibitively expensive.

d. Both agreements pierce the veil of confidentiality with the aim of facilitating tax compliance with a foreign tax authority.  However, Model 1 provides the greatest control for The Bahamas Government and its financial institutions over interactions between the IRS and Bahamian financial institutions.  Model 1 further ensures that the directives for FATCA compliance is based on Bahamian implementing law.